What’s behind the fall in rubber prices

Lower global demand, higher domestic production put the brake on rates

Unlike many commodities that have been heating up in recent times, prices of domestic natural rubber (RSS-4 variety) have been on a slide. The latest data available from the Rubber Board shows that prices have cooled down to about ₹124 a kg as of February 2018, from ₹159 a year ago.

The fall is intriguing, as domestic demand has been reasonably strong during this period. As per the latest available data, a total of 8,14,060 tonnes was consumed during April-December 2017, up 4.9 per cent from the same period a year ago.

Considering that about 65 per cent of the consumption is by the auto industry for the manufacture of tyres, this is corroborated by the pick-up in demand seen in the auto sector, after being intially pulled down by the GST transition.

Overall vehicle sales grew 11.28 per cent in April-December 2017, and has seen further pick-up since then.

One reason for the cooling off of domestic prices could be the fall in international prices in the past one year. The global price is currently ₹110 a kg, compared with ₹184 in February 2017. For most of this period, the international price has stayed well below the domestic price, with a difference of ₹6-27.

False alarm

Towards the end of 2016-17, rubber prices did look like it would continue its up-trend as it faced some supply tightness due to repeated floods in Thailand, firming up of US dollar against Asian currencies, and increased demand from China. But this was not to be.

Lower demand from the US and the UK dampened prices. New car sales in the US dropped 1.8 per cent year-on-year in 2017, after seeing many years of growth.

Sale of new four-wheelers in the UK also dropped 5.7 per cent year-on-year in 2017, driven by higher taxes on diesel cars due to pollution concerns.

China’s vehicle sale growth, too, looked a little jaded after similar concerns as that of the UK. Anti-dumping duty on Chinese tyres by countries such as the US and India, also affected production in China.

However, fall in international prices did not increase imports into India. Had it happened, it could have led to further crashing of domestic prices, hurting rubber growers.

According to the latest available data, total imports for April-December 2017 stood at 3, 33,301 tonnes compared with 3,60,924 tonnes during the same period a year ago — a drop of 7.6 per cent.

The fall in imports was due to certain restrictions placed on the import of natural rubber from early 2016 onwards. The Centre mandated that natural rubber be imported only through two ports — Chennai and Jawaharlal Nehru Port Trust (Navi Mumbai). This adds to the costs and delays of user industries which may not be located close to these two ports.

Also, with the levy of 25 per cent import duty on natural rubber, the differential between domestic and international prices was not wide enough to make imports attractive. With a price differential of 4-20 per cent, it would have even made imports costlier.

Higher domestic production, too, kept domestic prices under check.

The total output during the first three quarters of 2017-18 increased 4.4 per cent to 5,24,000 tonnes, from the same period a year ago. This has partly helped meet rising demand without leading to a spike in prices.

Outlook

According to the latest outlook given by the International Rubber Study Group in December 2017, world natural rubber demand is forecast to increase 2.4 per cent (over 2017) to 13.34 million tonnes in 2018. This is somewhat similar to the rise seen in 2017.

With international prices remaining unattractive due to a supply glut, major producers such as Thailand are taking measures to cut international supplies and prop up prices. According to reports available in public domain, Thailand plans to bring down annual supply by as much as 1 million tonnes to 3.3 million tonnes, before the end of 2018. Besides, Thailand, Indonesia and Malaysia — the three largest producers of natural rubber — have made an agreement to reduce exports in the first three months of 2018. They may repeat this in the coming quarters if prices don’t get the necessary boost.

These moves may buoy international prices in the months to come.

At the same time, demand for natural rubber from the top consumer, China, may fall. The proposed US tariffs on various imports from China, including tyres, may lower production in China.

Thus, even if natural rubber prices rise due to lower supply of the commodity, it may not climb sharply.